Internal Revenue Bulletin:
2008-28

July 14, 2008

Rev. Rul. 2008-34

Law school loan repayment assistance programs. This ruling clarifies that a law school loan made under a Loan Repayment
Assistance Program (LRAP) generally satisfies the requirements of
section 108(f)(1) of the Code, and is a “student loan”
within the meaning of section 108(f)(2).

ISSUE

Do the terms of a loan made under the Loan Repayment Assistance
Program (LRAP) described below satisfy the requirements of § 108(f)(1)
of the Internal Revenue Code, and is the LRAP loan a “student
loan” within the meaning of § 108(f)(2)?

FACTS

A, an individual, attended law school and
has student loan debt. Neither the loans nor the underlying loan
documents addressed whether any of the indebtedness would be forgiven
if A worked in a particular profession for a
specified period of time.

A’s law school offers a Loan Repayment
Assistance Program (LRAP) to help reduce the student loan debt of
graduates who engage in public service. The LRAP is designed to encourage
graduates to enter into public service in occupations or areas with
unmet needs. Under the LRAP, the law school makes loans that refinance
the graduates’ original student loan(s). To qualify for an
LRAP loan, a graduate must work in a law-related public service position
for, or under the direction of, a tax-exempt charitable organization
or a governmental unit, including a position in (1) a public interest
or community service organization, (2) a legal aid office or clinic,
(3) a prosecutor’s office, (4) a public defender’s office,
or (5) a state, local, or federal government office. The amount of
the LRAP loan is based on the graduate’s outstanding student
loan debt and annual income. After the graduate works for the required
period in a qualifying position, the law school will forgive all or
part of the graduate’s LRAP loan.

After A graduates from law school, A signs an LRAP promissory note and accepts the terms
and conditions of the law school’s LRAP loan. The LRAP loan
provides that the indebtedness will be forgiven if A works for a certain minimum period of time in a qualifying law-related
public service position.

LAW

Section 61(a) provides that gross income means all income from
whatever source derived. Section 61(a)(12) provides that gross income
includes income from the discharge of indebtedness.

Section 108(f)(1) provides that in the case of an individual,
gross income does not include any amount which (but for § 108(f))
would be includible in gross income by reason of the discharge (in
whole or in part) of any student loan if such discharge was pursuant
to a provision of such loan under which all or part of the indebtedness
of the individual would be discharged if the individual worked for
a certain period of time in certain professions for any of a broad
class of employers.

Section 108(f)(2) defines “student loan” for purposes
of § 108(f) to include any loan to an individual to assist
the individual in attending an educational organization described
in § 170(b)(1)(A)(ii) made by (A) the United States, or
an instrumentality or agency thereof, (B) a State, territory, or possession
of the United States, or the District of Columbia, or any political
subdivision thereof, or (C) certain tax-exempt public benefit corporations.
The Taxpayer Relief Act of 1997 (1997 Act), Pub. L. 105-34, added
§ 108(f)(2)(D), which amended and expanded the definition
of “student loan” to include loans made by the educational
organizations themselves if the loans were made either:

(i) pursuant to an agreement with any entity described in subparagraph
(A), (B), or (C) under which the funds from which the loan was made
were provided to such educational organization, or

(ii) pursuant to a program of such educational organization
which is designed to encourage its students to serve in occupations
with unmet needs or in areas with unmet needs and under which the
services provided by the students (or former students) are for or
under the direction of a governmental unit or an organization described
in section 501(c)(3) and exempt from tax under section 501(a).

The 1997 Act further amended § 108(f)(2) to provide
that the term “student loan” includes any loan made by
an educational organization described in section 170(b)(1)(A)(ii)
or by an organization exempt from tax under section 501(a) “to
refinance a loan to an individual to assist the individual in attending
any such educational organization but only if the refinancing loan
is pursuant to a program of the refinancing organization which is
designed as described in subparagraph (D)(ii).”[1] The legislative history to the 1997 Act explains that,
in the case of loans made or refinanced by educational organizations
(and loans refinanced by certain tax-exempt organizations), the student’s
work must fulfill a “public service requirement.” See H.R. Conf. Rep. No. 105-220, at 375-76 (1997).

ANALYSIS

The terms of A’s LRAP loan provide
for loan forgiveness only if A works for a certain
minimum period of time in a qualifying law-related public service
position. This requirement is consistent with the requirement in
§108(f)(1) to work in certain professions for a certain period
of time.

Additionally, the law school’s LRAP is designed to encourage
its students to engage in public service in occupations or areas with
unmet needs. All of the positions listed in the LRAP are for, or
under the direction of, a governmental unit or a tax-exempt charitable
organization. Further, the LRAP loan was made to refinance A’s original student loans. Therefore, the LRAP
loan meets the definition of a “student loan” in § 108(f)(2).

HOLDING

The terms of the loan made under the LRAP satisfy the requirements
of § 108(f)(1), and the LRAP loan is a “student loan”
within the meaning of § 108(f)(2).

DRAFTING INFORMATION

The principal author of this revenue ruling is Craig R. Wojay
of the Office of Associate Chief Counsel (Income Tax & Accounting).
For further information regarding this revenue ruling, contact Craig
R. Wojay at (202) 622-4920 (not a toll-free call).

[1] A technical correction clarified that gross income does not
include amounts from the forgiveness of loans made by educational
organizations and certain tax-exempt organizations to refinance any existing student loan (and not just loans made by
educational organizations). See Pub. L. 105-206, § 6004(f)(1),
and H. R. Rep. No. 356, 105th Cong., 1st Sess. 10 (1997).